India’s real gross domestic product in Financial Year 2020-21 could contract 5.3 per cent, said India Ratings and Research on Wednesday as it flagged the “disorder” caused to the economy by Covid-19 and the nationwide lockdown to contain the disease.
“This will be the lowest GDP growth in Indian history and the sixth instance of economic contraction, others being in FY58, FY66, FY67, FY73 and FY80,” said the ratings agency in a press release. It expects nominal GDP to contract 3.4 per cent for the year and gross value added to contract by 5.5 per cent.
“The disorder caused by the Covid-19 pandemic unfolded with such a speed and scale that the disruption in production, breakdown of supply chains/trade channels and total wash out of activities in aviation, tourism, hotels and hospitality sectors will not allow the economic activity to return to normalcy throughout FY21,” the agency said.
“As a result, besides contracting for the whole year, GDP will contract in each quarter in FY21. However, the agency believes the GDP growth would bounce back in the range of 5 per cent-6 per cent in FY22, aided by the base effect and return of gradual normalcy in the domestic as well as global economy.”
The estimate for FY22 is much lower than what other forecasts say. Some estimates expect the low-base effect to push GDP growth for FY22 to as high as 8-9 per cent. Separately, the government still expects that growth will bounce back in the second half of FY21, though it agrees with the Reserve Bank of India’s statement that GDP will contract this year.
“The credit and liquidity enhancing measures announced in the government’s economic package in combination with some of the earlier steps announced by the RBI will certainly address the supply-side issues of the economy. The Indian economy even before the COVID-19 related lockdown was suffering on the demand were floundering,” the agency said.
“The lockdown and its impact on economy and livelihoods only aggravated the sagging consumption demand. Ind-Ra believes the government is aware of it; but, the near absence of demand-side measures in the economic package indicates the hard budget constraint facing the government,” it said.
The agency also said that the fiscal deficit of the central government in FY21 is expected to more than double to 7.6 per cent of GDP from the budgeted estimate of 3.5 per cent of GDP. The majority of the fiscal slippage will be from the revenue side, it said.